The US Securities and Exchange Commission (SEC) have commenced an investigation into whether Binance Holdings Limited (Binance) breached US securities rules by selling BNB tokens at the time the crypto exchange was in its establishment phase.
Specifically, the SEC's investigation is looking into whether the 2017 initial coin offering (ICO) of BNB amounted to a sale of a security that ought to have been registered with the agency. In a statement, Binance said:
it would not be appropriate for us to comment on our ongoing conversations with regulators, which include education, assistance, and voluntary responses to information requests... we will continue to meet all requirements set by regulators.
Binance's original white paper outlined an offering of 200 million BNB tokens. Half of those were sold through the ICO, and the other half were provided to the Binance founders team. As a pitch to investors, Binance offered lower fees for traders paying with the BNB token as well as paying several of its contractors in BNB. One such contractor was a US resident who claims they purchased BNB during the ICO period - which potentially provides the SEC with the jurisdictional gateway they require to institute proceedings.
Binance's situation is similar to the Ripple Labs Inc. investigation in 2020. The SEC sued Ripple Labs as well as two of its executives in December 2020 for alleged contraventions of securities regulation in the sale of XRP token. Ripple Labs is arguing that the XRP token functions as a medium of exchange for virtual currency and is not a security, and that the SEC's claim was jurisdictionally flawed.
The SEC chair, Gary Gensler, has made clear that he believes all ICOs ought to be treated as securities and should therefore fall under the regulatory scheme and oversight of the SEC. The investigation into Binance is yet another reminder of uncertainty in securities regulation and highlights further the need for government consultation with the private sector and crypto industry participants.
The SEC's investigation and Mr Gensler's view of ICOs stands in contrast to the recent US regulatory reform Responsible Financial Innovation Act which would recognise that digital tokens are first and foremost an intangible property / commodity, absent some additional feature rendering them a security under US law.